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Can ART deliver much needed security as traditional capacity remains challenged?

06.10.22 The Big Question

As the discussions around the 1 January 2023 renewals intensify, there is a growing recognition that capacity will continue to be constrained and cedents will be required to look at new ways to meet the needs of their programmes.

As a result, the use of Alternative Risk Transfer (ART) solutions is set to play a far bigger role in the January and subsequent renewals throughout 2023 as the market is predicted to continue to see premium increases across property catastrophe and casualty classes.

The value of ILS and cat bond issuance has been fairly stagnant over the past two years and is still tantalisingly under the $100 billion mark. However, there are confident predictions that the record issuance figure of $98 billion will be broken in 2022 and will see a further, increase for 2023.

However, the past five years have seen some significant claims in the ART market, which have tempered the appetite of investors who, while viewing the investments as attractive, are seeking greater data around the models of the risks and the points at which the bond or security might react.

Adrian Bastow, CMO, AdvantageGo


Paul Schultz, CEO of Aon Securities, says the ongoing stress on the global reinsurance sector can only further the journey for Cat Bonds, ILS and wider ART instruments.

“The ILS market is continually being tested,” he adds. “The market may well be 25 years old but compared to the traditional reinsurance capacity, we are the new kid on the block.”

While traditional reinsurers have been speaking of their concerns over the severity and frequency of natural perils and the rising exposures, he says this has created a new demand for alternative risk solutions, although some investors are still struggling following past losses.

“We have seen some events in the past five years which have found themselves into the ART market and for some investors can best be described as fatigued,” Shultz explains. “I think we saw claims which had not been expected by the market.

“For those investors who have been in the market for an extended period they have seen the benefits that Cat Bonds and ILS instruments can bring. If you have only been investing for the past five years then it is not a comfortable place to be.

“Timing remains everything. Those recent investors are not getting the experience which has been enjoyed by those longer-term investors. At present, there is a supply/demand imbalance and it might be a good time to stay in if you can manage the hurdles of the past five years.”

Schultz adds that the sometimes-painful lessons of recent years have been learnt by the market, resulting in a change in the demands made of the cedent companies.

“Cedents are being much more transparent,” he says. “If you can see the risks and where they come from it is a pretty good time to deploy capital.”

However, the year so far has been far from plain sailing: “In terms of investment and new issuances the first half of 2022 was challenging,” Schultz says. “The market was in effect resetting the first six months so it could look to get from A to B.

“We felt May and June were not as difficult as the start of the year as the reset had been undertaken and it was a question of execution. There is a current preference for bonds, and there has been some particularly good performances in recent years. ”

“What I would say is that the investors are looking for products which are a little higher on the risk curve then previously. I think they want to get a little further from the risk.”

Schultz says the broker is working hard to engage with the market as the demand for alternative solutions continues to grow.

Reduced levels of traditional reinsurance capacity have also resulted in the demand for ART solutions increasing as cedents look to fill holes in their programmes.

Aon has said attracting new sources of capital to the market, combined with data-led portfolio differentiation, will be essential to meeting insurers’ reinsurance needs going forward. The broker is working hard to create capacity by attracting new capital to the market and expanding innovative risk transfer vehicles.

He predicts that catastrophe bonds will see a significant uptick both from 2022 and 2023.

“The catastrophe bond sector is set to record another year of growth as the reinsurance market heads towards the 1 January 2023 renewal,” Schultz explains. “Although high levels of demand exceed supply, catastrophe bond issuance remains on-track to match the record levels seen in 2021, with first half issuance robust at $7.94 billion, and a strong second half expected, as insurers and reinsurers turn to alternative capital to supplement traditional coverage.

“By 1 September, issuance of industry loss index bonds – which are a substitute for traditional retrocession – stood at $2.3 billion, which is equivalent to the full year total in 2021. Market conditions should also support growing interest in catastrophe bonds from regions traditionally regarded as non-peak zones, such as Europe and Asia Pacific.”

The broker takes the view that strong demand for alternative capital could encourage net inflows of capital during the January renewals, particularly for catastrophe bonds.

Higher demand has resulted in marked improvements in margin, a trend that is expected to continue. Some 67 percent of catastrophe bonds issued as of July 2022 were priced at, or above, the high-end of guidance, while pricing year-on-year was 20 percent higher.

“Most investors have been more selective, directing their capital to existing sponsors and the most robust structures,” adds Schultz. “As margins continue to improve, we would expect investors to allocate further capital, and new investors to be attracted to the marketplace. Additional inflows, however, will depend on the sector’s performance during the north Atlantic hurricane season and overall economic volatility.”

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